WASHINGTON D.C.: U.S. job growth slowed sharply in June while the labor force participation rate fell to its lowest level in more than five years, pointing to a cooling labor market and reinforcing expectations that the Federal Reserve will keep a close watch on incoming economic data.

The Labor Department said nonfarm payrolls increased by 57,000 jobs last month, well below economists' expectations of 110,000. Payroll figures for April and May were also revised lower by a combined 74,000 jobs.

The unemployment rate eased to 4.2% from 4.3% in May, but the decline was largely driven by about 720,000 people leaving the labor force. The participation rate fell to 61.5%, its lowest level since March 2021.

Despite the weaker June report, employment gains averaged 111,000 jobs per month during the second quarter, well above the 34,000 monthly average recorded during the same period last year.

Some economists said the slowdown in hiring could reflect the delayed effects of the Middle East conflict, which pushed up gasoline prices and inflation, reducing consumer spending. They pointed to a loss of 61,000 jobs in the leisure and hospitality sector, the biggest decline since the pandemic, which the government attributed to "weaker than usual seasonal hiring."

Professional and business services led job gains with 36,000 new positions, followed by social assistance with 25,000 and healthcare with 22,000. Construction added 11,000 jobs, manufacturing gained 3,000 and government payrolls increased by 8,000.

Restaurants and bars shed 32,900 jobs, while hotels and motels lost 21,700 positions despite expectations that the FIFA World Cup, hosted jointly by the United States, Canada and Mexico, would boost summer hiring.

"June is usually a strong month for travel, restaurants, hotels, and entertainment," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University. "Some of this may be payback after earlier strength, but it also raises a broader concern; lower-income consumers may be pulling back, and service employers may be less confident about summer demand."

Economists generally described the labor market as remaining in a "low hire, low fire" environment, with historically low layoffs continuing to support overall employment even as hiring remains subdued. They also said the weaker payroll figures were more consistent with other labor market surveys, including small-business hiring plans that have pointed to softer employment growth.

"I would expect that most policymakers would continue to regard the labor market as stable and neither too hot nor too cold," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "There was a substantial knee-jerk reaction in financial markets, including scaling back the odds of rate hikes this year. I view the latter as an improper response."

Average hourly earnings rose 3.5% from a year earlier, up slightly from 3.4% in May but still below the 4.2% annual increase in consumer prices recorded in May. Economists warned that wages continuing to trail inflation could eventually weigh on consumer spending.

The report was released a day early because of the U.S. Independence Day holiday on July 4. Financial markets expect the Federal Reserve to leave interest rates unchanged this month, while lowering expectations for a rate increase in September following the latest employment data.